Dixons survives high-street electricals meltdown – but for how long?

Electrical goods retailers have been struggling against competition online – now the economy is making their battle even harder

Dixons is the market leader, owner of the Currys and PC World brands, but its wafer-thin margins have fallen to less than 2% in the UK in recent years. Photograph: David Sillitoe for the Guardian
David Sillitoe/Guardian

"The market is too small in the UK for three major retailers," says analyst Ben Hunt at Oriel Securities. "Pressure over the years from supermarkets and the internet has meant the returns are just far too low."

Amazon's small overheads and Tesco's huge scale have enabled cheaper products to eat away at the specialists' profits. So far they have resisted the fate of the book and record stores swept off the high street by online rivals. Could the worsening economy now push yet another retail category into the virtual universe?

The UK electricals market, including phones, was worth nearly £29bn in 2010, according to researcher Mintel, and is still dominated by the specialists, who control about 52% of sales. Home shopping and supermarkets have about 15% each. But the balance is tipping away from specialists: they had 54% in 2009.

Comet's chances of a comeback look slim. The 78-year-old chain's positioning as the bargain alternative to Currys was not compelling enough to produce a profit, and the chain lost £9m last year. Its former parent, Kesa Electricals, is paying £50m to buyer OpCapita to sweeten the deal, in exchange for a share of any future profits, should they materialise.

At the other end of the market, John Lewis has built a reputation for giving the best advice to shoppers. In the run-up to Christmas, its consumer electronics floors are so overrun that the dreaded ticketing machines are put into action. In 1950s-style queues shoppers wait patiently for their number to come up so they can to speak to an assistant.

John Lewis Partnership has beaten the downward trend in sales; its electricals and home technology takings increased 3.8% in the first six months of this year. The numbers are not published, but topline growth is unlikely to be reflected in the profits.

Panmure Gordon retail analyst Philip Dorgan says: "John Lewis has done well in sales but has had to give it all away in profit. It is the template of good customer service but its profits performance has probably been worse than Dixons."

Dixons is the market leader, owner of the Currys and PC World brands, but it operates on wafer-thin margins, which have fallen below 2% in the UK in recent years. Chief executive John Browett was brought on board in 2007 to turn the group around, and has set a target of 3%-4% margins when the market recovers. He is well regarded for his efforts to improve the look of his shops and the quality of his staff. Dixons' reputation for employing ill-trained kids pushing the most expensive products in order to increase their commission is no longer deserved. The larger stores now have concessions from manufacturers, including Apple, which sends in its own staff.

But there is a mountain to climb. The latest financial results showed UK like-for-like sales down 10% in the last quarter on the year before. There were tough comparators: the 2010 World Cup in South Africa sent viewers out in search of new television sets, but the flat-screen wave has now crested.

The housing market is paralysed, so fewer washing machine are sold. In 2011, as consumers brace for a new recession, only smartphones are booming.

Unfortunately, Dixons doesn't sell many. There is a profit-share deal with Phones4u, with about 90 concessions installed in Dixons outlets. But the smartphone market belongs to mobile phone specialists, and they are expanding their range into PC World territory.

Having pulled the plug on its 11 Best Buy UK stores, just 18 months from launch, Charles Dunstone's Carphone Warehouse Group will now invest its cash in another concept, Wireless World. There will be up to 400 of these shops by next March, selling laptops, tablets and smartphones.

Explaining the strategy, Best Buy Europe's chief executive, Andrew Harrison, said last week: "We've decided that rather than playing in the world of washing machines and dishwashers, we are going to focus on the higher margin, more in-demand product category."

One source of consolation for real world retailers is that customers want the reassurance of face-to-face contact. Consultant Ben Slater, who has advised Best Buy and Dixons on new technology, says: "Bricks-and-mortar retailers use service to differentiate themselves from online competitors. These are expensive items, and having a physical presence takes the fear out of the purchase."

Electricals shops also have the manufacturers on their side. Over the last 18 months, major brands have been offering Dixons discounts in return for reaching volume targets and for training staff to demonstrate their products. Why? "The internet makes shoppers focus on price over features," says group communications director David Lloyd-Seed. "It erodes premium product quite quickly.

"Our shops enable customers to experience the features and benefits of the products on offer as well as newer and premium technology. The internet cannot match that and generally erodes price for manufacturers."

The current thinking is that websites owned by high-street chains should gain more traction with consumers than purely internet retailers. "The tide is turning in favour of a specialist operator that operates multichannel," says Dorgan at Panmure Gordon. "If something goes wrong, you are better off having bought it at Currys than from someone you've never heard of online."

With both Sony and Apple working on a new generation of internet-connected TV sets, expected some time in 2012, technology's latest must-have will soon be upon us. After that, internet-connected fridges and coffee-makers perhaps. Complicated products that require detailed demonstrations. To find a market, the internet's new progeny will need shopfloors.